When working with GDP data, economists are using the market value of aggregate output
Q.When working with GDP data, economists are using the market value of aggregate output in order to facilitate comparisons across years rather than just the amount of output itself (e.g. the value of refridgerators and apples produced rather than the quantities). Why is that–what problem does this address? This solution of using values is not a perfect solution. What new issues arise when we try to compare market values of aggregate output across time periods. How do macroeconomists attempt to address this issue? (150words)
When we calculate GDP we do not include intermediate goods. We also leave out things like securities (stocks and bonds) and we leave out used goods. Would it be more or less accurate for economists to include some or all of these? Explain what issues arise in each of these three cases if they were to be included in our measure of GDP
Gross domestic product
Gross domestic product is the total monetary value of all final goods and services produced in a given period of time by every individual and companies in a particular country,(Rajewski, Z. 1994). It includes every person or company in the county including foreign ones.
The reason why economist use market value aggregate is because, it is not possible to add different types of goods and get a common quantity. For Example, if we produce 10 refrigerators and 20 apples, it will be wrong to say we produced 30 goods. Therefore the most appropriate way to show the above case is to determine the market value of the two commodities and finding the total value.
Problems encountered will be; production of heterogeneous goods, it is hard to calculate GPD using quantities of goods since goods produced in the county are of different types. The changes in the prices of goods and services leads to incorrect GDP figures, (Rajewski, Z. 1994). It is also difficult to give the new goods and services a market value. Market value of some goods is changed as they may require improvements.
The attempts made to address these problems includes, Using of personal income which represents income available for use, calculating the disposable income which is already taxed for individuals.
Using intermediate goods, securities and used goods in measuring Gross domestic product will make the economist to be less accurate. Intermediate goods are goods/services used in production of the final product. (Statistics, S. 2013) The cost of intermediate goods is normally included in the cost of final goods and services. Including their cost when measuring GDP therefore means that there will be double counting. Securities, these are bonds which are issued by the government and promise to pay after an agreed period. They are normally not payment of final goods thus including them in GDP gives an exaggerated figure. (Rajewski, Z. 1994). Used goods, these are already used goods, there are goods sold to a second partner by the initial person who bought them. This means that the market value is already included in the GDP, including them hence result to double counting.
In conclusion care need to be taken when calculating the national income figures so as to avoid double counting.
Rajewski, Z. (1994). Gross domestic product. Eastern European Economics, 32(4), 71-80
Statistics, S. (2013). Gross domestic product. Singapore.